General Awareness

Criterion of Sugar prices in India

General awareness or GK is a must for cracking CAT and for updating you on this MBARendezvous has started series of articles to equip CAT aspirants with topics on general awareness with the hope that you would achieve Mission CAT 2012

Today’s article is on “Criterion of Sugar prices in India”

India is the second largest producer of sugar in the world after Brazil accounting for 14.49 percent of global sugar production. According to International Sugar Organisation, in 2012-13 sugar production in India is estimated around 24.5 million tonnes while the domestic demand is pegged at 22 million tonnes. However, the higher supply than demand is unlikely to result in fall in prices as government has allowed export of sugar to the tune of 3 million tonnes in the current year.

A Dual Pricing System is adopted in the Indian sugar industry, which includes sugar price in Public Distribution System (PDS) and the free market price. The Government of India fixes the sugar prices distributed through the PDS, based on the levy sugar prices and the subsidy to be provided through budgetary system while the free market price is determined by the demand and supply of sugar as well as cost of production of sugar.

Cost of procuring sugar-cane, which is the basic raw material in production of sugar is estimated to account for 60-70percent of the total cost of sugar production. Price of sugar as well as the price of sugar-cane both are politically sensitive and therefore often witness the government intervention.

Till 2008-09 season, the price of sugar was determined by Statutory Minimum Price (SMP). From the 2009-10 season, the Centre has decided to fix Fair and Remunerative Price (FRP) as the price to be paid by the sugar mills to the sugar-cane farmers instead of the Statutory Minimum Price (SMP) earlier. FRP is the minimum price that sugarcane farmers are legally guaranteed. However, the sugar mills are free to offer any price above the FRP. FRP is linked to a basic recovery rate of 9.5 per cent, subject to a premium of Rs 1.46 for every 0.1 percentage point increase in recovery above 9.5 per cent. Recovery rate refers to the amount of sugar produced from the crushed cane. Sugar-cane season is from October to September and in 2011-12 season and FRP of sugarcane is fixed at Rs 145 per quintal for the 2011-12 season, starting October.

The FRP is fixed after taking into consideration the margins for sugarcane farmers on account of risk as well as profit on the cost of production of sugarcane, including the cost of transportation. It includes a margin of nearly 45 per cent on account of profit and risk to the farmers on the all India adjusted average cost of production of sugarcane, including the cost of transportation to the mill gate. Moreover, individual states are allowed to declare State Advised Price (SAP) over and above FRP.

However, after the introduction of FRP, farm organisations presented a well-documented case to prove that the cost of cultivation does not fall under Rs 2,200 per tonne of sugarcane. They have also shown that, given the present market situation for sugar, as also for the by-products, the sugar manufacturing mills should have no difficulty in paying the farmers an advance of Rs 2,200 per tonne as FRP and pay additional amounts commensurate with the evolution of the domestic and global market situation for sugar and other by-products in the ensuing year. On the other hand, the sugar industry representatives presented their case and challenged such demands. In this manner, consensus about sugar-cane prices between the mill owners and sugar-cane farmers is rare.

India has ideal conditions for growing sugarcane at a low cost, such as tropical climate, easy availability and low cost of labour, and low cost of irrigation facilities etc. Sugar recovery rates in India are not significantly lower, as compared with the international standards. Nevertheless, the operating margins in the sugar industry are moderate. However, the net profit margins are low, due to the high debt levels. The debt-equity ratio of the sugar industry is high, due to the high borrowings required for funding sugar inventories. Inventory costs with domestic producers are high because sugar production is seasonal. In addition, sales of domestic producers are controlled by the government. As a result of the high debt-equity ratio, the interest coverage ratio of the sugar industry is low. All these factors result in unsatisfactory margin to mill owners as well as unsatisfactory remuneration to farmers.

As of now, the sugar industry is gradually being decontrolled and in a decontrolled environment, the sugar producers will need to implement new strategies, in order to be successful. Sugar producers are expected to benefit with the discontinuation of the release mechanism, as producers will be able to control the sales volume, based on the prevailing demand-supply situation.

In order to make the industry increasingly productive for farmers as well as the mill owners, more reforms are required in the industry. The Central government is examining a proposal to introduce a revenue-sharing price mechanism for sugarcane that allows farmers to not only get a basic price for their produce, but also share the revenues of the sugar factories when their (factories) profits exceed certain level. But such moves must be preceded by more deregulation of the industry so that the production of sugar and sugar-cane remains sweet for mill owners as well as cane farmers.